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The New York Stock Exchange is still waiting for the opening bell as I commence this story, but Caterpillar (NYSE:CAT) is already up 2.7% in pre-market trading as the company reported an earnings of increase just in excess of 20% at $1.1 billion and a diluted profit per common share of $1.81, up 26% from $1.44 year-on-year.
CAT shares closed yesterday at 84.87, but were already at 87.16 by 9:20 EDT, minutes before trading is set to begin for the day.
The Downside
In a nutshell, “Sales declined in all regions except North America.” The collective sales slumps in Europe, Africa & the Middle East (down 11%), Asia/Pacific (down 13%) and Latin America (down 19%) more than offset the 9% increase in North American sales, resulting in a 4% decrease in overall revenue from $13.2 billion in Q1 2014 to $12.7 billion in the most recent quarter.
The Upside
The most obvious is already clear, with earnings up so dramatically that CAT has revised its earnings forecast upward for the full year from $4.60 to $4.80 per share and from $4.75 to $5.00 when restructuring costs are excluded.
The Outlook
CEO Doug Oberhelman sees the slow growth of the North American economy as “the bright spot we have now.” By comparison, he describes the rest of the world as struggling. Given that most Americans see their economy as struggling, Oberhleman’s observation might be capable of bursting a few bubbles, despite the Q1 results.
In fact, the company is warning investors not to expect the same favorable results during the remainder of the year. The real chink in the CAT armor may be buried deep in the report on page 11: “The sales volume decrease was primarily related to lower end-user demand, partially offset by the favorable impact of changes in dealer inventories.” Dealer inventories increased from $700 million in Q1 2014 to $900 million in 2015. Until the global economy improves, the end-user demand will remain weak. As long as end-user demand remains weak, CAT revenues are likely to decline as dealers are forced to sit on inventory, whilst not having any reasons to order more.
The company discussed its dependency on, and relationship with, the oil and gas industry, saying that, ” Although we are confident in the long-term fundamentals of the oil and gas industry, in the near term and especially in the latter part of 2015, we expect the decline in oil prices will have a negative impact on our sales.” The report went on to say that, “While we believe lower oil prices will be positive for consumers around the world and act like a fiscal stimulus for net oil importing countries, we do not think the positive impact to the overall economy will occur soon enough to have a significant impact on our 2015 sales.”
Share Price Update
CAT shares have declined over the first 45 minutes of trading today, which seems to be an indication that investors are beginning to put more weight on the outlook than on the Q1 earnings. Regardless of the boilerplate legalese that always warns about forward-looking statements, the investing public tends to see those as tempering positive outlooks more so than the kind that CAT made this morning.
CAT shares remain up 1.41% at 86.07.
